埃尼石油 (E) 2006 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the First Calgary conference call on Monday, the 31st of July, 2006. Throughout today's presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS). I will now hand the conference over to Mr. Rick Anderson. Please go ahead, sir.

Thank you. Good afternoon and good morning to those who have phoned in from North America. My name is Richard Andersen, I'm the Chief Executive of First Calgary Petroleum and I welcome you to this conference call to release First Calgary's six-month results and to give an operational overview.

With me from First Calgary are Martin Layzell, First Calgary's Senior Vice President Algeria Country Manager; Mr. Shane O’Leary, First Calgary's Chief Operating Officer; and Mr. John van der Welle, First Calgary's Finance Director, Chief Financial Officer. I trust most of you have had the opportunity to review the six-month results and read the President's report and the management discussion and analysis. My plan is to review the highlights and then open the phone lines to questions you may have of me or any of my colleagues with me.

The Company's primary focus is Block 405b in Algeria in which we have until December 29th remaining in the five-year primary exploration period. After that we go into a two-year appraisal period. The immediate objective is to capture as many reserves and define the pool boundaries as best we can prior to December 29th.

I'm going to jump down to point 4 on the highlight page initially and then return to the top. The Company completed an equity financing in the second quarter of this year of US$143 million to fund this exploration and appraisal program through the balance of 2006 and well into 2007. We have increased the capital budget for this year to US$150 million which includes the drilling of 12 wells. We have five wells either completed or underway as we speak and a further seven wells planned for the balance of the year.

In our last operational update we advised the Company has three drilling rigs operating and that testing was underway on the LEW-2, an appraisal well to the LEW-1 well. The LEW-2 well did flow hydrocarbons, 10.6 million cubic feet of gas a day and 825 barrels of condensate per day. The well is positive for the mapping of the overall structure; however, the test data does indicate a restricted reservoir volume most likely due to faulting.

The next three wells to be drilled were the ZER-1 exploratory well in the extreme northwest corner of the Block and the GSM-1 and GSME-1 exploratory wells on the extreme south of the central portion of the block. All three wells have been cased. Testing is currently underway on ZER-1; it is early days nothing to report yet. Testing has just been completed on GSM-1, results currently being analyzed as are the logs from GSME-1. The significance of these three wells is that ZER-1 is testing a completely separate structure in the far northwest corner of the Block. GSM-1 and GSME-1 are testing the southern limits of the central area.

The next set of wells to be drilled are LES-4, which is an appraisal well to the LES-3 oil discovery recently announced, and MZLS-2 and MZLM-2, both of which are appraising discoveries. Drilling is underway on two of the wells and the rig is currently moving to the third location, MZLN-2. LES-4 is a very important well in that it is appraising the LES-3 oil discovery in the TAGI formation which did flow in excess of 8,000 barrels of oil per day and is a candidate for early production. I also make the comment that LES-4 is being drilled right down to the Devonian. We are very optimistic that by the end of this year we will have evaluated the majority of the perspective areas of Block 405b.

Let me now move back to the top of the highlights page and comment on commerciality. To bring reserves to production in Algeria you must have commerciality declared. The commerciality declaration is base on what is called the Final Discovery Report. The Final Discovery Report for the MLE field was submitted early July and only a couple of issues remain to be finalized which are being worked on as we speak. Time wise we are on track to have the ELA, which is the Exploitation License Area, approval the second half of this year which will lead to development commencement the first half of 2007 and first production 2009.

The FEED, which is the Front And Engineering and Design, will be awarded shortly, and the EPC, which is the Engineering Procurement Contracts, early 2007. This causes us to now focus on project debt financing for the first stage development of the MLE field. In July First Calgary announced Citigroup as the financial advisor on raising project debt for the development of the first stage, as I said, the MLE field.

In summary, the plan for the balance of this year is to finalize the gas sales agreement, obtain the ELA approval for the MLE field, continue our drilling and testing program to capture as much of the reserves as possible, progress the FEED work in anticipation of awarding the EPC early 2007, and project debt finance the MLE field. On that I would like to pause now and open the lines to any questions any of you may have of me or my colleagues. Operator, could you please now coordinate the questions?

(OPERATOR INSTRUCTIONS). Glenn James.

Rick, it's Glenn James from Canaccord in London. Just wondering -- you mentioned on the GSME-1 that you're looking at the logs. Is there a time scale you can offer us as to how long you're going to be looking at the logs and whether you will move to test or not?

At this point, as I said, we are evaluating the logs, having just completing them. Timewise, we have to coordinate this with Sonatrach. So I would say there will be an update, if you will, on this probably within the next two to three weeks.

Thank you.

[Mehmet Khant].

That's Mehmet Khant at UBS. Hi, guys. My question is regarding the LEW-2. That was targeting possible reserves and you were intending or hoping to convert a significant portion of possible reserves into perhaps proven and profitable reserves. How much, based on your initial estimate, how much of possible reserves do you think have been affected by this LEW-2 well? Do think you have lost some of the possible reserves here?

No, what I would say to that, Mehmet, the nature of the development we're in right now is to appraise the other limits, if you will, of the pools already discovered. And it's not expected that all wells will test like the initial wells. As far as reserve numbers and how much of the possible is impacted, I wouldn't comment on that now; we have no way of knowing. As far as reserves go, you will be looking at this entire project at the end of the year, that's when we will have the numbers.

Again, on the LEW-2, you were targeting four zones, did all of them flow gas or some of them did or some didn't? Could you comment on that if possible?

Mehmet, it's Shane O’Leary. There was principally one zone that flowed the full volume.

Thank you.

Jason Squires, Wellington West Capital Markets.

This is Jason Squires, Wellington West Capital Markets in Toronto. Good morning, gentlemen. This is a question in regards to the recent proposed changes to the hydrocarbon law in Algeria. I'm just curious if you have tried to estimate the impact of either the windfall tax or the increased share of Sonatrach?

We have been looking at it, but unfortunately the proposed amendments -- legislation if the will, has not been received. So therefore we have nothing concrete that we can analyze yet. So it's very difficult for us to comment on it. We are watching, we are waiting, we are seeking advice from counsel in Algiers. I know it sounds like I'm avoiding the question, but we haven't seen the legislation so it's difficult to analyze it.

And my understanding is it needs to be signed by the President for it to be ratified. Is that what's left?

I don't think that's all that's left -- I don't think it's been actually tabled yet. So that ultimately does have to happen, but we're still waiting to see the initial legislation.

Thank you. And finally, do you have an estimate of the gas sales agreement timing?

We are working on it. It's one of the final issues here to be resolved in the Final Discovery Report. And we're making good progress, we're optimistic. Eminent is probably the wrong word, but we're optimistic it's going to be completed in the near future.

Okay, thank you.

Alan Winters.

Alan Winters, individual investor. My question is there are three wells according to this report that have been completed. Should we expect within say the next month concrete numbers on those three wells?

This is Martin Layzell. I think that's a fair time frame. As we mentioned, we're still in discussions reviewing the data with our partners in Sonatrach. That does take some time. I would say one to two months sort of time frame we should know quite a lot more on those three wells.

Thank you.

Andrew [Whittock].

Good afternoon, gentlemen. It's Andrew Whittock here from Oriel Securities here in London. I wondered if we could just go back to the gas sales discussions you've been having -- clearly made some progress over the last three months. I wonder if you could just update us on whether your thoughts or Sonatrach's thoughts on volumes are changing at all and whether you've actually firmed up that Sonatrach will be the gas buyer?

This is Shane O’Leary. With regards to the buyer, there were two options available to us. One was to form a joint marketing company with Sonatrach and directly pursue markets in Europe. The other option was for us to entrust Sonatrach to sell the gas -- our portion of the gas on our behalf and we would pay them a marketing fee to do that.

We've chosen to pursue option two which is to have Sonatrach market the gas on our behalf. And in terms of the volumes, that's all really part of the negotiations that we have going on with Sonatrach -- includes things like take or pay, volumes, duration of contract, price and unfortunately I'm not in a position to share that with you until we've concluded the discussions with Sonatrach.

And if I could just follow up on that, could you give us an indication of when you hope to be able to update us on those issues?

We hope very shortly. I would say that almost all of the issues have been finalized except for one issue which is perhaps the most important. But that is coming together and we expect to conclude the discussions very soon I guess is the only way I could describe it.

Okay, thanks very much.

Toby Pierce.

Tristone capital. And I'm just wondering, you've got three rigs running right now and two workover rigs. Do you feel after the end of the exploration phase if you'll keep those on and in the two years what you plan to do next in the appraisal phase or if you've got that far yet?

Just to direct you just a little bit there, we have three drilling rigs going right now and two testing units, they're not workover rigs, just wireline testing units. Likely we'll move ahead with at least two rigs into 2007. We're reviewing whether or not we need to keep the third rig going until that time, but we do have that choice. We have the choice to keep three going if we wish. So at a minimum two.

I think the other side of that comment too -- this is Rick Anderson again -- is when we get into the development drilling on the MLE we would probably contract an additional two rigs that would be dedicated to drilling the development wells in that field.

All right. Thank you very much.

[Neil Wopat].

Individual investor. Are there any buyout discussions or joint ventures other than things with Sonatrach going on at the moment?

No, there are not. As you know, a little over a year ago we exited the Lehman process and stated a stand-alone go-forward strategy. We are sticking with that. We think that's the best way to maximize shareholder value and so there are no discussions as far as a buyout. And as far as joint venture partners at this time, we're not pursuing that either. We are working on a go-forward strategy, stand-alone strategy.

Okay, thank you.

James Stevenson.

James Stevenson, Canadian Press here in Calgary. Rick, can you comment on projected cost of the field [840]? Is that something that's pretty fluid at this point or where can that go from here?

This is Shane O’Leary. The MLE development is really the first phase of the 405b Block development and we are looking at a gross cost in the $800 million to $1 billion range. That includes a facility and all the development wells, gathering systems -- and the key part of the cost is the export lines that have to go about 140 kilometers to the tie-in point on the national grid. That's a good portion of the cost.

Thank you.

(OPERATOR INSTRUCTIONS). Mark Redway.

Mark Redway from RAB Capital. Can we just go back and revisit what you found on LEW-2? I think the earlier questioner asked how many horizons were in encountered and you were expecting to be able to flow test from up to four. you only tested from one; was that because the other three were not encountered or were deemed to be water wet or dry or could you just expand on that a little bit please?

I can't recall exactly the number of perforations we made in that bore hole, but the most successful zone there was the one that was referred to. The other were zones that we tested that were hydrocarbon charged and the flows were not significant. So there was one main zone I guess is the way to put it there.

Where does this leave LEW-2 structure in terms of further appraisal?

What this means is that this is encouraging, that's quite a large stepout from LEW-1, several kilometers to the north. And as was indicated, this tells us that the structure is hydrocarbon charged in that zone and in fact in other zones as well. Now faulting as referred to dare it is likely faulting which has reduced the size of the reservoir compartment that we drilled into. You have to remember, this is a 6 inch borehole in a structure that's tens of square kilometers in size.

Faulting is commonplace in the basin, and part of the reason you drill an appraisal well is to step out there and see what the fringes of the outer regions of the field are like, what's the structure like, is it hydrocarbon charged, is it the sand there? Basically that well told us some things there. It certainly in no way writes off anything. What it does do is tell us about that particular part of the field.

Is there an LEW-3 planned?

The question is there an LEW-3 well planned?

Yes.

There will be an LEW-3 we would think. It's not on the immediate drilling plan. Basically we have between now and the end of this year left for the true exploration period and no we've looked very carefully at where we want to drill. Obviously there are a limited number of wells that we can in that time frame. LEW-3 is likely to be drilled but not between now and the end of the year.

Okay, thank you.

Mehmet Khant.

Me again here. I'd just like to know if there's a new reserve report in progress. Is there any work towards that or do you plan to get a new reserve report done in the near future or possibly before the commercialization?

Yes, this is John van der Welle. Just to reiterate what the situation is over reserve reports. Basically, as you know, we produced a reserve report with the independent signature of DeGolyer and McNaughton -- their report of course on us -- each year for the annual financial statements under the rules of the Toronto stock exchange. And that is the cycle of producing reserve reports.

At this point in time with all this information coming in, the multiple wells that are being drilled, a lot of new information coming in, it's not sensible for us to have a real time update of the reserve report. As I say, it's driven off the financial reporting process. So there will be no reserve report that we talk about or is indeed created until such time as we look at the position after this year's drilling and in the first few months of next year ready for the financial statements for 2006.

And so commerciality has really nothing to do with independent reserve report, it is something defined between you and Sonatrach?

That's correct. The MLE commercialization is based around a reserve number -- I'm going to defer to Shane and Martin on this, but essentially there's no DeGolyer and McNaughton independent report that is a necessary step the commercialization.

That's right, independent studies, reservoir models are used as well as of course our own and Sonatrach's, but a reserve report is not one of those.

Okay, thank you.

Brian La Fleur.

Brian La Fleur, Scotia Capital, private investor. You eluded in your press release to the successful completion of LES-4 which is going to test up the LES-3. What would your plans be for getting that oil to market and what kind of timeframe would we look at obviously to get cash flow of front to fund further development would be certainly attractive. Can you maybe comment on that?

This is Shane O'Leary. We haven't actually completed LES-4; I'm not sure if you said that or not, but we're drilling LES-4. If LES-4 is successful and proves up a certain reserve size we would be looking at an early oil development concept and that could involve getting oil on-stream hopefully within 15 months, something like that. We're onshore. There are roads in the area, if need be we could truck the oil out. Of course all of this has to be agreed by Sonatrach.

But there is a possibility if we can prove up a sufficient reserve somewhere in the order of 30 to 50 million barrels say, that we could have an 8,000 to 10,000 barrel a day development on within 15 months. Having said that of course we have not finished LES-4. We're drilling that now and we're anxiously awaiting the results of that.

Great, thanks a lot.

Alan Winters.

Independent investor. A follow-up question. The moving of 3P into 2P has been a very prominent theme in your past news releases and in your press conferences. Can you update us on the progress of moving 3P into 2P?

Yes, I think how I would answer that is we came out and stated our strategy was twofold and that was to, as you just said, move 3P reserves into proven and probable and move forward with the commercialization. Really what it is is to strengthen the reserves and move a lot of this upside into 2P, which we are very comfortable with the results to date. As far as the numbers, again, we won't have them until year-end so I wouldn't want to venture a guess as to where we stand today as far as how much have we moved. But I would repeat that we're quite happy with our results to date.

Thank you.

Matthew [Mosby].

It's Matthew Mosby from Centaurus Capital in London. The question I have is just if you could please give us some sort of indication on the timing of when we might hear three -- point one, if you will test GSME-1; two, the test results of GSM-1; and three, the test results of ZER-1 and when we could expect to hear those points individually or if you'll back into them?

It's Martin Layzell. We're testing ZER-1 right now. When that will finish I cannot say. We then have to evaluate the results. We have to work closely with Sonatrach and they will have their ideas; they may want to see a second zone tested or something like that. So we're also reviewing with Sonatrach the results from GSME and there are some technical discussions planned there. I would say that over the next month or two with regard to GSM and GSME we should know where we stand. As I mentioned earlier on in the call, ZER may well fit into that time frame. So I'm hoping within two months you should see results there. But no absolute guarantees but that's an approximate timeframe.

Thank you very much. Sorry if I repeated it, I missed the start of the call. But thank you.

(OPERATOR INSTRUCTIONS). Glenn James.

Just a follow-up question again on GSM and GSME. These are obviously quite big stepouts to the south. Do you need to drill in between to take forward the land after the end of this year?

Drilling between what, sorry?

Is there further drilling necessary between the existing 3P and what you may have found or may not have found further south? Is there further drilling necessary in order to make sure that you keep these prospects after the end of this year?

Well, the process is that having digested the results from the wells, towards the end of the year, towards the end of the exploration phase we apply to Sonatrach to retain an area that we deem as perspective or productive. That will be discovery reports and it's that area that moves forward after the end of the exploration phase. So I can't say at this time, we don't know at this time what the extent of that area is and whether further drilling will be required. We feel very comfortable with the drilling plan that we have between now and the end of the year that we're making the absolute -- optimizing the areas that we want to retain beyond the end of the exploration phase.

So but I guess the key issue is the drilling at GSM and GSME enough to take forward all of the land and the exploration potential that you think you've identified from what you have discovered on the existing 3P right down to where you've actually drilled at GSM and GSME?

I think you've answered your question there. You said this is a key question, it is. You should not confuse 2P areas, 3P areas coming from D&M or something like that with what we will retain eventually with Sonatrach. The two are not necessarily related directly. We're evaluating GSM and GSME. Right now I don't know if further drilling will be required and exactly what area. We do have an area in mind that we're going to be moving forward with in terms of proposing, but it's still on the drawing board and it's still in its early stages right now.

Thank you.

Neil Wopat.

Neil Wopat again, and individual investor. Is it a fair thing to say that when the next DeGolyer and McNaughton report is done, whenever that may be, and the result of all this activity that we're doing, would it be fair to say that there will be a significant amount of 3P moved into 2P?

This is John van der Welle again; I don't have a crystal ball I'm afraid. Obviously we're halfway through the year, as we said earlier, and the report will be done in the first quarter next year as a precursor to the financial results being published. And it would be wholly wrong of us to speculate on what the outcome of that will be. There's a lot of work that's necessary in generating that report by DeGolyer and McNaughton and we're only halfway through the year and in fact in terms of the additional information that will be going into it subsequent to when the last report was published.

Just as perspective from shareholders which have much less information for us -- available to us than you do. Can we look forward to more 2P in 2007 or is it insignificant to what we've done so far?

I'm sorry to sound unhelpful, but I think my last answer really deals with it. I can't give you a prediction until DeGolyer and McNaughton do the work.

Okay, thank you.

Mehmet Khant.

Sorry to keep coming at you guys with more questions. My question is related to the gas sales agreement. One of the obviously key items for the gas sales agreement is pricing of natural gas. Does the potential windfall tax have any impact on your negotiating strategy with the Algerian government at this point or is it too late in the game to change that?

Well, we don't know what the impact of the windfall profits tax is, Mehmet, because we haven't seen the legislation. And so we are pressing ahead with our discussions or negotiations on the gas sales price. And no, the potential windfall profits tax has not been factored in.

Okay, thank you.

Nick Richardson.

No company name but I'm calling from the UK. My question to whoever wants to answer it is what really do you believe your relationship with Sonatrach is? Is it sometimes that they've got you over a barrel or are they used sometimes as a scapegoat?

That's a bit of a devil in the deep blue sea kind of question I think. I think our relationship with Sonatrach is a very positive one. You're talking our relationship in terms of our working relationship or any specific things in mind?

As a professional relationship as definitely in a working relationship, sure. It seems sometimes that everything has to be approved and perhaps the time lags are held up, therefore investors feel frustrated because they're not copied in on information is it becomes available.

I personally attended every single management meeting since FCP went into Algeria on both our blocks and the relationship is very strong. We're getting very good support from all levels of management within Sonatrach. We work very closely with them on the operational front. And if anything right now, they're supporting us and trying to get us to move very quickly through this presentation of the final discovery report and they want to move very quickly. So I really I don't see anything negative right now at all that way.

This is John van der Welle. Just to supplement Martin's comment in the area about the timing of information to investors, obviously we need to properly abide by the rules of the stock exchanges in which we're listed in relation to releasing material on disclosed information when we have it and we do that of course very carefully. But at the same time we have to also respect the process that is there in our production sharing contract with Sonatrach which does require them to have involvement in and comment on the content of information that we make public. So we need to manage in both directions and we obviously seek to do so to abide by our contractual obligations in Algeria and our stock exchange obligations in the UK and Canada.

Points taken.

Can I just ask, when you said no company name does that mean you're an individual shareholder?

Yes, it does.

Thank you.

Thank you. We have no further questions.

This is Rick Anderson again. As that appears to begin of the questions, let me thank all of you for taking the time to phone in. We are pleased with the progress the Company has made with the continuing exploration and appraisal of the Block and the commercialization of the reserves. We have been able to grow our production group in Calgary with top quality people which speaks well for the Company's asset and bodes well for the future. We have entered a new phase, management and staff is quite excited about the future. And on that note I would thank you for phoning in and say good-bye.

That concludes the conference call. Thank you for participating.